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Inflation Report 1/2005

Explore the main features of the economic outlook through detailed projections and uncertainty charts for Consumer Price Index and GDP growth. Understand interest rate expectations, forward rates, exchange rate trends, real exchange rates, and more.

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Inflation Report 1/2005

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  1. Inflation Report 1/2005

  2. Main features of the economic outlook

  3. 30% 50% 70% 90% Chart 1 Projections and uncertainty for CPI-ATE.1) 4-quarter change. Per cent. 01 Q1 – 08 Q4 1) The bands in the fan indicate different probabilities for developments in the CPI-ATE.Probabilities are based on the difference between projected and actual developments in underlying inflation in the period 1997 –2004 Sources: Statistics Norway and Norges Bank

  4. 30% 50% 70% 90% Chart 2Projections and uncertainty for growth in mainland GDP.1) Annual change. Per cent. 2001 – 2008 1)The bands in the fan indicate different probabilities for growth in mainland GDP.Probabilities are based on the difference between projected and actual developments in mainland GDP in the period 1994 -2003 Sources: Statistics Norway and Norges Bank

  5. Section 1

  6. Chart 1.1 Interest rate expectations.Actual developments and expected key rate1) at 10 March 05. Per cent. 2 Jan 03 – 1 Nov 06 UK Norway Euro area US 1)FRAs and futures contracts adjusted for the estimated difference between 3-month money market rates and the key rate Sources: Reuters and Norges Bank

  7. Chart 1.2Forward interest rates1) 2).Monthly figures.Per cent. Jan02 – Dec 08 3-month money market rate Forward rate 28 October 04 (IR 3/04) Forward rate 10 March 05 1) The money market rate is normally about ¼ percentage point higher than the sight deposit rate 2) 3-month money market rates to end-February 2005 Source: Norges Bank

  8. Chart 1.3 Forward interest rates.Monthly figures. Per cent.Oct04 – Dec 08 Norway Trading partners1) 10 March 05 28 October 04 1) Estimated as a weighted average of trading partners' forward rates Source: Norges Bank

  9. Chart 1.4 Nominal effective exchange rate1).Import-weighted exchange rate index (I-44, 1995=100) and the trade-weighted exchange rate index (TWI, 1990=100).Monthly figures. Jan 90 – Feb 05 TWI I-44 1)A rising curve denotes a weaker krone exchange rate Source: Norges Bank

  10. Chart 1.5 Real exchange rates (relative consumer prices and labour costs in common currency).Annual figures.Per cent.Deviation from average 1970 – 20041) Relative prices3) Relative labour costs in manufacturing2) 1) Average nominal exchange rate (TWI) for 2005 based on the average so far this year (through 10 March) 2) Projections for wage growth in 2005 from IR 1/05 3)Projections for consumer price inflation in 2005 from IR 1/05 Sources: Statistics Norway, TRCIS, the Ministry of Finance and Norges Bank

  11. Chart 1.6Value added, mainland Norway.Index. 2001 = 100.Seasonally adjusted.Quarterly figures. 99 Q1 – 04 Q4 Services1) Goods Mainland Norway 1) Excluding public sector Source: Statistics Norway

  12. Chart 1.7 Output, employment and productivity.Average quarterly growth (annualised) up to 04 Q4. Per cent Sources: Statistics Norway and Norges Bank

  13. Chart 1.8 Number of sick pay days paid by the National Insurance per employee.1) Per cent. Annual figures. 1980 – 2004 1) Since 2000 the sick pay scheme has also applied to all central government employees.This results in a break in the series between 1999 and 2000 Source: National Insurance Administration

  14. Chart 1.9Person-days lost due to sickness absence, both self-certified and doctor-certified, for employees aged 16-69.Per cent of contractual person-days. Quarterly figures.00 Q2 – 04 Q3 Source: Statistics Norway

  15. Chart 1.10 Demand.Average quarterly growth (annualised) through 04 Q4. Per cent Sources: Statistics Norway and Norges Bank

  16. Chart 1.11 Housing investment and housing starts. Seasonally adjusted. 00 Q1 – 04 Q4 Housing starts, in 1000 m2 (right-hand scale) Housing investment, in millions of2002-NOK (left-hand scale) Sources: Statistics Norway and Norges Bank

  17. Chart 1.12Growth in credit to households and enterprises.1) 12-month growth. Per cent. Jan 97 – Jan 05 Credit to households Credit to non-financial enterprises 1)From domestic sources (C2) Source: Norges Bank

  18. Chart 1.13 Mainland fixed investment. Average quarterly growth (annualised) through 04 Q4. Per cent 1) 1) Excluding public sector Sources: Statistics Norway and Norges Bank

  19. Chart 1.14 Vacant office premises in Oslo, Asker and Bærum.Per cent of total property stock. Annual figures. 1991 – 20051) 1) As at February Source: Eiendomsspar AS

  20. Chart 1.15CPI-ATE1).Total and by supplier sector.2) 12-month change. Per cent.Jan02 – Feb 05 Goods and services produced in Norway CPI-ATE Imported consumer goods Actual IR 3/04 1)CPI-ATE: CPI adjusted for tax changes and excluding energy products 2)Norges Bank's estimates Sources: Statistics Norway and Norges Bank

  21. Chart 1.16Contribution to the decline in the CPI-ATE inflation from Dec 01.Percentage points. Jan 02 – Feb 05 Imported consumer goods House rents Other services Remainder1) 1) Agricultural products, fish products, consumer goods produced in Norway, services with wages as dominant factor Sources: Statistics Norway and Norges Bank

  22. Chart 1.17CPI-ATE.Seasonally adjusted monthly change.3-month moving average, annualised. Per cent. Jan 04 – Jun 051) Historical Projections 1)Projections from Mar05 – Jun 05 Sources: Statistics Norway and Norges Bank

  23. Chart 1.18The output gap1) and CPI-ATE. Quarterly figures. Per cent. 99 Q1 – 05 Q32) CPI-ATE Output gap 1)Quarterly figures for the output gap have been derived from annual figures. 2)Projections for 2005 Sources: Statistics Norway and Norges Bank

  24. Section 2

  25. Chart 2.1 Chinese imports of crude oil and oil prices.Monthly imports in millions of tons.Oil price, USD/barrel.6-month moving average.Apr 94 – Dec 04 Oil price (left-hand scale) Chinese imports of crude oil (right-hand scale) Sources: EcoWin / National Bureau of Statistics and Norges Bank

  26. Chart 2.2Chinese imports of aluminium and aluminium prices.Monthly imports in thousands of tons.Aluminium price in USD/ton.6-month moving average. Apr 94 – Dec 04 Chinese imports of aluminium (right-hand scale) Aluminium spot price (left-hand scale) Sources: EcoWin / National Bureau of Statistics and Norges Bank

  27. Chart 2.3 Oil price1) in USD per barrel. Forward prices from 28 Oct04 and 10 Mar 05.Daily figures. 2 Jan 02 – 31 Dec 07 10 March 05 28 October 04 IR 3-04 1) Brent Blend Sources: Telerate, IPE and Norges Bank

  28. Chart 2.4Crude oil stocks in the US.In million barrels. Weekly figures. Jan 03 – Mar 05 2004 2005 2003 Source: Energy Information Agency

  29. Chart 2.5 Oil price futures.USD per barrel of light crude. Monthly figures. Jan 01 – Mar 051) Delivery next month Delivery in 6-7 years 1) The figure for March is the average up to and including the 10th Sources: EcoWin/NYMEX and Norges Bank

  30. Chart 2.6Producer prices among trading partners. 4-quarter change. Per cent. 98 Q1 – 04 Q4 Sources: National statistical offices and Norges Bank

  31. Chart 2.7Indicator of external price impulses to imported consumer goods measured in foreign currency. Annual figures. Per cent.1995 – 20081) 1) Projections for 2005 -2008 Source: Norges Bank

  32. Chart 2.8Investment intentions survey.Oil and gas recovery incl. pipeline transport.Estimated and actual investments.In billions of NOK 2005 2004 2002 2003 May Aug Nov Feb May Aug Nov Feb Estimate made previous year Estimate made same year Final figures Source: Statistics Norway

  33. Chart 2.9Underlying spending growth in the government budget and nominal growth in mainland GDP.Growth on previous year. Per cent. 1985 – 2005 Underlying spending growth Nominal growth in mainland GDP Sources: Ministry of Finance (NB 2005) and Statistics Norway

  34. Chart 2.10 Unit labour costs (ULC).Wholesale and retail trade and mainland Norway excl. public sector. Index. 1990=100.Annual figures. 1970 – 2004 Mainland Norway excl. public sector Retail trade Sources: Statistics Norway and Norges Bank

  35. Section 3

  36. Chart 3.1The output gap1) and CPI-ATE. Quarterly figures. Per cent. 99 Q1 – 05 Q32) CPI-ATE Output gap 1) Quarterly figures for the output gap have been derived from annual figures. 2)Projections for 2005 Sources: Statistics Norway and Norges Bank

  37. Chart 3.2 Real interest rate after tax.1) Quarterly figures. 85 Q1 – 04 Q4 3-month rate 5-year rate 1)3-month money market rates deflated by the CPI excluding energy products up to 1995, Norges Bank's estimates for the CPI adjusted for tax changes and excluding energy products from June 1995 to July 2000, thereafter the CPI-ATE.The same deflator is used for 5-year rates, but from 2001 Q2 the inflation target of 2½ per cent is used Sources: Statistics Norway and Norges Bank

  38. Baseline scenario Forward rates 10 March Chart 3.3 The interest rate in the baseline scenario and forward interest rates in Norway. Quarterly figures. 04 Q1 – 08 Q4 Source: Norges Bank

  39. Chart 3.4a 3-month money-market rate and import-weighted exchange rate (I-44)1) 2) in the baseline scenario. Quarterly figures. 04 Q1 – 08 Q4 Interest rate (left-hand scale) Import-weighted exchange rate (I-44) (right-hand scale) 1) A rising curve denotes a weaker krone exchange rate 2) The figures for 2005 Q1 are based on the average through 10 March Source: Norges Bank

  40. Chart 3.4b Projections for the CPI-ATE and output gap in the baseline scenario. Quarterly figures. Per cent. 04 Q1 – 08 Q4 CPI-ATE Output gap Sources: Statistics Norway and Norges Bank

  41. Chart 3.5a 3-month money market rate in the baseline scenario and in alternative scenarios with high and low interest rates. Quarterly figures.04 Q1 – 08 Q4 Baseline scenario High interest rate Low interest rate Source: Norges Bank

  42. Baseline scenario High interest rate Low interest rate Chart 3.5b Projections for the CPI-ATE and the output gap in the baseline scenario and in alternative scenarios with high and low interest rates. Quarterly figures. Per cent.04 Q1 – 08 Q4 CPI-ATE (solid lines) Output gap (broken lines) Sources: Statistics Norway and Norges Bank

  43. Baseline scenario High interest rate Low interest rate Chart 3.6 Credit to households (C2) in the baseline scenario and in alternative scenarios with high and low interest rates.Annual percentage change in stock.2002 – 2008 Source: Norges Bank

  44. Chart 3.7a3-month money-market rate and import-weighted exchange rate (I-44)1) 2) in scenario with lower inflation. Quarterly figures. 04 Q1 – 08 Q4 Interest rate in scenario with lower inflation (left-hand scale) Interest rate in baseline scenario (left-hand scale) Import-weighted exchange rate (I-44) in scenario with lower inflation (right-hand scale) 1) A rising curve denotes a weaker krone exchange rate 2)The figures for 2005 Q1 are based on the average through 10 March Source: Norges Bank

  45. Chart 3.7bProjections for the CPI-ATE and output gap in the scenario with lower inflation. Quarterly figures. Per cent. 04 Q1 – 08 Q4 CPI-ATE Output gap Sources: Statistics Norway and Norges Bank

  46. Chart 3.8a3-month money-market rate and import-weighted exchange rate (I-44)1) 2) in scenario with stronger exchange rate. Quarterly figures. 04 Q1 – 08 Q4 Interest rate in scenario with stronger exchange rate (left-hand scale) Interest rate in baseline scenario (left-hand scale) I-44 in scenario with stronger exchange rate (right-hand scale) 1) A rising curve denotes a weaker krone exchange rate 2)The figures for 2005 Q1 are based on the average through 10 March Source: Norges Bank

  47. Chart 3.8bProjections for the CPI-ATE and output gap in the scenario with a stronger exchange rate. Quarterly figures. Per cent. 04 Q1 – 08 Q4 CPI-ATE Output gap Sources: Statistics Norway and Norges Bank

  48. Chart 3.9a3-month money-market rate and import-weighted exchange rate (I-44)1) 2) in scenario with stronger output growth. Quarterly figures. Per cent. 04 Q1 – 08 Q4 Interest rate in scenario with stronger output growth (left-hand scale) Interest rate in baseline scenario (left-hand scale) Import-weighted exchange rate (I-44) in scenario with stronger output growth (right-hand scale) 1) A rising curve denotes a weaker krone exchange rate. 2)The figures for 2005 Q1 are based on the average up to 10 March. Source: Norges Bank

  49. Chart 3.9bProjections for the CPI-ATE and output gap in the scenario with stronger output growth. Quarterly figures. Per cent. 04 Q1 – 08 Q4 CPI-ATE Output gap Sources: Statistics Norway and Norges Bank

  50. Monetary policy rulesThe Taylor rule:Interest rate = inflation target + equilibrium real interest rate + 1.5 x (inflation - inflation target) + 0.5 output gapThe rule was presented in 1993 by Professor John B. Taylor at Stanford University (see Taylor, J.B. (1993): "Discretion versus policy rules in practice", Carnegie-Rochester Conference Series on Public Policy 39, pp. 195-214.In Chart 3.10 we have used the CPI-ATE as a measure of inflation.The Orphanides rule:The Taylor Rule is vulnerable to error in the estimation of the output gap.Athanasios Orphanides, who is a researcher and adviser in the Federal Reserve, therefore proposes the alternative of replacing the output gap with the difference between actual growth and trend growth in the economy (the growth gap).See Orphanides A., R. D. Porter, D. Reifschneider, R. Tetlow and F. Finan (2000) ”Errors in the measurement of the output gap and the design of monetary policy”, Journal of Economics and Business, vol.52, pp.117-141.Rule with interest rates abroad: Interest rate = 0.5 x Taylor rate + 0.5 x Money market rate among Norway's trading partners.

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